Episode 60 of the FS360 Podcast - Interest Rates : Fixed or Variable?

Summary of the podcast:

Fixed or variable home loan rates? It’s a question that every new home owner faces but it’s one that there is no simple answer to.

Sitting down to chat with Gavin Nash on the FS360 Podcast, Mulcahy & Co Director of Lending Warren Freeman and Finance Brokers Emily Geer-Smith and Liam Nankervis discussed how they help clients to decide what rate suits their circumstances best.

“If you were looking at a variable interest rate, this implies that your rate is subject to any movement and usually that’s dictated by the Reserve Bank of Australia (RBA),” Nankervis said.

“The other side of that is the fixed rate mortgage, where you will have a set rate for a period of time that is usually between one and five years, set by the lender.”

When it comes to the discussion of which rate is a better route to take when looking for a home loan, there’s no one size fits all.

As Freeman explained, the better choice of rate varies and it’s not until further down the line that it becomes clear which decision was best.

“There’s been many times when fixed have been cheaper than variable … and there’s been other periods where the fixed rates have been higher and that’s the way it is at the moment,” Freeman said.

“We’re negotiating for most of our home loan clients’ (variable) rates under the 6% mark from around about the 5.6 mark, but your fixed rates start with a 6.

“If you want to fix and get that security today, you’re going to pay a premium … we won’t know if it’s right until that crystal ball comes into more clarity in months to come.”

With every home loan decision comes an element of risk, but specialists such as Freeman, Geer-Smith and Nankervis are here to educate homeowners on the best choice for their circumstances.

“I think the most important thing for anyone who’d be listening … would be that it’s a conversation about their circumstances,” Nankervis said.

“People do need to understand that we can’t tell them what to do, it’s really going to come down to these pros and cons that you get from a variable, fixed rate mortgage or maybe even a combination of both of them.”

As Geer-Smith explained, a fixed and variable combined home loan is an option to consider.

“It sort of gives you the best of both worlds. If you’ve got a mortgage of, for example, $300,000, you could split that loan into two sections,” Geer-Smith said.

“Let’s say you wanted to fix for five years, over that five-year period what’s the maximum of extra repayments you think you can make?

“Let’s say you think you can pay down the loan by $50,000, we would keep that $50,000 portion of the loan variable, to allow you to make those extra repayments.

“We would fix the remainder of your loan … so that is secure, you know exactly what your repayments are going to be over the longer term.”

The extensive list of lenders that the Mulcahy & Co team have on their panel means they could find the ideal rate for every client’s circumstances.

This was required for one of Geer-Smith’s clients in 2023. She had purchased a town house block of land over 12 months ago, however when she contacted her bank in June, she was told they could not help and she was in danger of losing her deposits.

“She was self-employed, so we were relying on income that was almost 12 months old from her 2022 (tax) returns,” Geer-Smith said.

“We had a bit of a conversation … at the time we were talking about what her income would look like if we could get 2023 returns completed.

“I was able to narrow down the one lender who would allow us to use her tax returns the second that they were done, didn’t have to be lodged … we didn’t need her notice of assessment.

“They would let us use the value of the land now that had gone up since she signed her contract, even though it hadn’t been a full 12 months yet.

“The accountant had the returns drafted ready to go Monday 3 July … which was very lucky because we settled only two weeks later.”